Exchange Rate Is The Price Of A Nation 's Currency

844 Words4 Pages
Exchange Rate The exchange rate is the price of a nation’s currency in terms of another currency. The domestic currency and the foreign currency are the two components of an exchange rate. In a direct quotation, the price of the foreign currency is expressed in terms of the domestic currency and the vise versa is the indirect currency. Most exchange rates use the US dollar as their base currency and other currencies as the counter currency. There a few exceptions, the Euro and commonwealth currencies such as the Australian dollar, the British pound and the New Zealand dollar (Investopedia, LLC., 2014). The current rate; Yen US$1 = JPY 105 US$1 = C$1.1050 Making C$1.1050 = JPY 105 or C$1 – JPY 95.02 (Investopedia, LLC., 2014) Selling…show more content…
Company A builds automobiles in Japan, then exports to the US and Company B builds automobile in the US and sells those automobiles in the US. Company A cost are 1.2 million yen ($10,000 US) to make standard automobiles in Japan and it cost company B $10,000 to produce similar automobiles in the US. The cost for both manufacturing companies are about the same, both companies sell the similar automobiles for $15,000. This means both manufactures profit $5,000 on each automobile which become 600,000 yen. Exchange Is At 120 Yen/Dollar In a different scenario where the yen is 100 yen/dollar. Company A still has cost of 1.2 million yen, because the yen is stronger it will cost company A $12,000 in terms of dollar to produce automobiles. Company B still produces automobiles for $10,000 per automobile, company B is not impacted by the exchange rate. If automobiles still sell at $15,000, Company A profits $3,000 per automobile , 300,000 yen and company B still profits $5,000 per automobile, 500,000 yen. Both manufactures will make less money in terms of yen. This decline will be much more severe for company A. Exchange Is At 100 Yen/Dollar Exchange Is At 140 Yen/Dollar Company A has a mismatch between its currency at production and its currency at sale, profits are
Open Document